It's natural for companies and their investors to be happy, even complacent, when their earnings per share (EPS) and share prices rise. A falling share price may not be a sign of poor performance, however: The Home Depot's fell from 1999 to 2003, yet the company created more value than every North American retailer except Wal-Mart Stores by continuing to grow and improve its return on capital.

After the extreme ups and downs of financial markets during the past decade, boards of directors, senior managers, and investors are rethinking the way they define and assess corporate performance. There's nothing wrong with good accounting results and rising share prices, but they don't necessarily indicate whether a company is fundamentally healthy, in the sense of being able to sustain its current performance and to build profitable businesses in the future.

Nonetheless, a company can construct a comprehensive performance assessment that measures the value it has created and estimates its ability to create more. As a way of judging how well a company is doing, such an assessment is far superior to any single performance metric. It can also help management to balance the short- and long-term creation of value and board members...